fhfa 400 7th street sw washington, d.c. 20024 2016 report ......federal housing finance agency 400...

F E D E R A L H O U S I N GF I N A N C E A G E N C Y

400 7th Street SWWashington, D.C. 20024

202-649-3800 • www.fhfa.gov

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2016Report toCongress

http://www.fhfa.gov

Melvin L. WattDirector

Federal Housing Finance Agency

KEY MANAGEMENT OFFICIALS

Nina NicholsDeputy DirectorDivision of Enterprise Regulation

Bob RyanActing Deputy DirectorDivision of Conservatorship

Fred GrahamDeputy DirectorDivision of Federal Home Loan Bank Regulation

Sandra ThompsonDeputy DirectorDivision of Housing Mission and Goals

Lawrence StaufferActing Chief Operating Officer

Alfred PollardGeneral Counsel

Sharron LevineAssociate DirectorOffice of Minority and Women Inclusion

Janell Byrd-ChichesterActing Ombudsman

Laura S. WertheimerInspector General

FEDERAL HOUSING FINANCE OVERSIGHT BOARD

Melvin L. WattChairman

Steven T. MnuchinSecretary, U.S. Department of the Treasury

Benjamin S. Carson, Sr.Secretary, U.S. Department of Housingand Urban Development

Jay ClaytonChairman, Securities and Exchange Commission

List of Abbreviations AHP ...........................Affordable Housing Program

AMA ..........................Acquired Member Assets

Bank Act...................Federal Home Loan Bank Act

CDFI ..........................Community Development Financial Institution

CSP ............................Common Securitization Platform

CSS ............................Common Securitization Solutions, LLC

Dodd-Frank Act .....Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Enterprises ..............Fannie Mae and Freddie Mac

Fannie Mae .............Federal National Mortgage Association

FHFA OIG ................Federal Housing Finance Agency Office of Inspector General

FHA ...........................Federal Housing Administration

FHLBank ...................Federal Home Loan Bank

FISMA .......................Federal Information Security Management Act

Freddie Mac ............Federal Home Loan Mortgage Corporation

HAMP .......................Home Affordable Modification Program

HARP ........................Home Affordable Refinance Program

HERA .......................Housing and Economic Recovery Act of 2008

HMDA .......................Home Mortgage Disclosure Act

MBS ...........................Mortgage-Backed Securities

MPF ...........................Mortgage Partnership Finance

OF ..............................Office of Finance

PRISM .......................Procurement Request Information System Management

PSPA .........................Senior Preferred Stock Purchase Agreement

Regulated Entities .....................Fannie Mae, Freddie Mac,

and the FHLBanks

REO ..........................Real Estate Owned

Safety and Soundness Act........Federal Housing Enterprises

Financial Safety and Soundness Act of 1992

SDQ ..........................Seriously Delinquent

Treasury Department ............U.S. Department of the Treasury

UPB ...........................Unpaid Principal Balance

VA ..............................Veterans Administration

Correction Notice: The following information was corrected in this document on 9/18/2017. The first four rows of the last column in Table 23 on page 116 were updated with data for four quarters of 2016. The figures previously included 2015 data (49,449; 47,412; 47,653; and 48,275) which was in error.

Federal Housing Finance Agency 400 7th Street, SW, Washington, D.C. 20024

Telephone: (202) 649-3800 www.fhfa.gov

June 15, 2017

Honorable Michael D. Crapo Honorable Sherrod Brown Chairman Ranking MemberCommittee on Banking, Housing, Committee on Banking, Housing, and Urban Affairs and Urban Affairs United States Senate United States Senate Washington, D.C. 20510 Washington, D.C. 20510

Honorable Jeb Hensarling Honorable Maxine Waters Chairman Ranking MemberCommittee on Financial Services Committee on Financial Services United States House of Representatives United States House of Representatives Washington, D.C. 20515 Washington, D.C. 20515

Dear Chairmen and Ranking Members:

I am pleased to enclose the Federal Housing Finance Agency’s (FHFA’s) 2016 Report to Congress. This Report meets the requirement of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 (HERA), that FHFA submit a report to Congress describing the actions undertaken by FHFA to carry out its statutory responsibilities, including a description of the financial safety and soundness of the entities the Agency regulates. It also meets FHFA’s obligation under Section 1305 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to report to Congress on the Agency’s plans to “continue to support and maintain the nation’s vital housing industry, while at the same time guaranteeing that the American taxpayer will not suffer unnecessary losses.”

During 2016, FHFA continued to serve as regulator of the 11 Federal Home Loan Banks (FHLBanks) and the FHLBanks’ joint Office of Finance and as regulator and conservator of Fannie Mae and Freddie Mac. The enclosed Report summarizes the findings of the Agency’s 2016 examinations of these entities as well as FHFA’s actions as conservator of Fannie Mae and Freddie Mac during 2016. It also describes FHFA’s regulatory guidance, research, and publications issued during the year.

As required by HERA, this Report also includes the Federal Housing Finance Oversight Board’s assessment of the matters set out in Section 1103 of that Act.

Sincerely,

Melvin L. Watt Director, Federal Housing Finance Agency

R E P O R T T O C O N G R E S S • 2 0 1 6 i

http:www.fhfa.gov

2016Report to Congress

C O N T E N T S

Supervision and Oversight .......................................... iv

Examination Authority for Regulated Entities ............. 1

Reports of Annual Examinations of Fannie Mae and Freddie Mac ...................................... 2

Financial Condition of the Enterprises ..................... 2

Fannie Mae (Federal National Mortgage Association) ................ 5

Freddie Mac (Federal Home Loan Mortgage Corporation) .......... 7

Report of Annual Examinations of Federal Home Loan Banks .................................................................. 9

Financial Overview ................................................... 9

District 1: The Federal Home Loan Bank of Boston ................................................................ 19

District 2: The Federal Home Loan Bank of New York ........................................................... 20

District 3: The Federal Home Loan Bank of Pittsburgh ........................................................... 21

District 4: The Federal Home Loan Bank of Atlanta ................................................................ 22

District 5: The Federal Home Loan Bank of Cincinnati ........................................................... 23

District 6: The Federal Home Loan Bank of Indianapolis ........................................................ 24

District 7: The Federal Home Loan Bank of Chicago .............................................................. 25

District 8: The Federal Home Loan Bank of Des Moines ........................................................ 26

District 9: The Federal Home Loan Bank of Dallas ................................................................. 27

District 10: The Federal Home Loan Bank of Topeka ............................................................... 28

District 11: The Federal Home Loan Bank of San Francisco .................................................... 29

Office of Finance .................................................... 30

Results of Stress Tests Under the Dodd-Frank Wall Street Reform and Consumer Protection Act .... 31

Enterprise Housing Goals and Duty to Serve ............ 34

Federal Home Loan Bank Mission and Housing Goals ..................................................... 38

Regulatory Guidance .................................................. 44

Regulations ............................................................ 44

Policy Guidance ..................................................... 48

Conservatorships of the Enterprises ........................ 50

Managing the Conservatorships ................................ 51

MAINTAIN .............................................................. 52

REDUCE ................................................................. 57

BUILD ..................................................................... 59

Legislative Recommendations ................................... 62

Research and Publications .......................................... 64

Reports to Congress .................................................. 65

House Price Index ...................................................... 66

Public Use Database .................................................. 66

Historical Database (MIRS) ........................................ 66

National Mortgage Database Project ......................... 67

Research Publications ................................................ 67

FHFA Operations and Performance ......................... 68

Performance and Program Assessment .................... 69

Financial Operations ................................................... 70

Federal Housing Finance Oversight Board Assessment ..................................................................... 72

Enterprises .................................................................. 73

Federal Home Loan Banks ......................................... 75

Appendix: Historical Data Tables ............................. 76

F E D E R A L H O U S I N G F I N A N C E A G E N C Yii

T A B L E O F C O N T E N T S

F I G U R E L I S T

Figure 1 • Enterprises’ Net Interest Income 2012-2016 ..........................................3

Figure 2 • Enterprises’ Total Mortgages and Guarantees ........................................4

Figure 3 • Historical Portfolio of the Federal Home Loan Bank System ..................9

Figure 4 • Federal Home Loan Banks Aggregate Net Interest Income and Net Income...............................................................10

Figure 5 • Retained Earnings of the Federal Home Loan Banks............................11

Figure 6 • Total Year-End Federal Home Loan Bank Advance Holdings ($ Billions)...........................................................................13

Figure 7 • Market Value of Equity-to-Par Value of Capital Stock by Various Interest-Rate Changes ...................................................................15

Figure 8 • 2016 Annual Maximum Compensation for Federal Home Loan Bank Directors.................................................................16

Figure 9 • Federal Home Loan Bank Compensation for 2016 ...............................17

Figure 10 • Federal Home Loan Bank Director Expenses for 2016 .......................17

Figure 11 • Federal Home Loan Bank Director Compensation and Expenses for 2016 ....................................................................................18

Figure 12 • Fannie Mae and Freddie Mac Stress Test Results ..............................32

Figure 13 • Federal Home Loan Bank Regulatory and Leverage Capital Ratios Under the Severely Adverse Scenario Projection............................................33

Figure 14 • Enterprise Housing Goals Performance for 2015-2016.......................35

Figure 15 • Federal Home Loan Bank Affordable Housing Program Statutory Contributions ....................................................................................39

Figure 16 • 2016 Affordable Housing Program Competitive Application Overview...................................................................40

Figure 17 • Number of Affordable Housing Program Homeownership Set-Aside Grants Used for Rehabilitation Assistance (2009-2016) .................................40

Figure 18 • Number of Affordable Housing Program Projects Approved in 2016 Receiving Federal Funds....................................................41

Figure 19 • 2016 Non-Depository Community Development Financial Institution Members of the Federal Home Loan Bank System........43

Figure 20 • Non-Performing Loan Sales by the Enterprises...................................55

Figure 21 • Enterprise Single-Family Mortgage Credit Risk Transfer Activity 2013-2016 ............................................................................57

R E P O R T T O C O N G R E S S • 2 0 1 6 iii

Supervisionand OversightExamination Authority for Regulated Entities

Report of Annual Examinations of Fannie Mae and Freddie Mac

Reports of Annual Examinations of the Federal Home Loan Banks

Results of Stress Tests under the Dodd-Frank Wall Street Reform and Consumer Protection Act

Enterprise Housing Goals and Duty to Serve

Federal Home Loan Bank Mission and Affordable Housing Programs

Regulatory Guidance

iv F E D E R A L H O U S I N G F I N A N C E A G E N C Y

S U P E R V I S I O N A N D O V E R S I G H T

Examination Authorityfor Regulated Entities

Section 1317(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act), as amended, 12 USC § 4517(a), requires FHFA to conduct annual on-site examinations of the Enterprises and the FHLBanks. Examination of the FHLBanks is also performed pursuant to Section 20 of the Federal Home Loan Bank Act (Bank Act), as amended, 12 USC § 1440. The FHLBank System includes the 11 FHLBanks and the Office of Finance, a joint office of the FHLBanks.

For each regulated entity, FHFA prepares an annual report of examination, which identifies weaknesses and assigns examination ratings. FHFA communicates deficiencies and violations at regulated entities as adverse findings. 2016 reports of examination were delivered to the directors and management of the Enterprises in March and to the FHLBanks periodically throughout the year based on FHFA’s examination schedule.

Scope of Examination

FHFA conducts supervision using a risk-based approach to identify existing and emerging risks to the regulated entities, to evaluate the overall effectiveness of each regulated entity’s risk management systems and controls, and to determine compliance with laws and regulations applicable to the regulated entity. In 20161, FHFA’s examination activities included targeted risk-based examinations and ongoing monitoring, including assessing the remediation of previously issued Matters Requiring Attention (MRAs). FHFA also assesses the responses of the regulated entities’ boards of directors and management to certain deficiencies and weaknesses identified by the regulated entities’ internal audit departments and external auditors.

The Federal Housing Finance Agency (FHFA) was

established by the Housing and Economic Recovery

Act of 2008 (HERA) and is responsible for the effective

supervision, regulation, and housing mission oversight

of the Federal National Mortgage Association (Fannie

Mae), the Federal Home Loan Mortgage Corporation

(Freddie Mac), and the Federal Home Loan Bank

System, which includes the 11 Federal Home Loan

Banks (FHLBanks) and the Office of Finance (OF).

The Agency’s mission is to ensure that Fannie Mae

and Freddie Mac (the Enterprises) and the FHLBanks

(together, “the regulated entities”) operate in a safe

and sound manner so that they serve as a reliable

source of liquidity and funding for housing finance and

community investment. Since 2008, FHFA has also

served as conservator of Fannie Mae and Freddie Mac.

Rating System

The term CAMELSO refers to the seven components of the examination framework that FHFA uses to report its examination findings to its regulated entities. Those components are Capital; Asset quality; Management; Earnings; Liquidity; Sensitivity to market risk; and Operational risk.

Supervision of Fannie Mae and Freddie Mac

FHFA’s Division of Enterprise Regulation (DER) is responsible for carrying out on-site examinations and ongoing supervision of the Enterprises. In 2016, FHFA performed examination activities in the areas of credit, market, model, and operational risk, as well as governance, compliance, accounting, auditing, and financial disclosure. Enterprise examinations include assessment of the safety and soundness of each Enterprise, e.g., financial performance, condition, and overall risk management practices, as well as compliance with regulations.

Examination activity at each Enterprise is led by an Examiner-in-Charge and is carried out by an on-site team with support from offsite subject matter experts. Following completion of examination activity, DER communicates any adverse findings in writing to the Enterprise

Unless otherwise specified, all dates in this report refer to 2016.

R E P O R T T O C O N G R E S S • 2 0 1 6 1

1

2 F E D E R A L H O U S I N G F I N A N C E A G E N C Y

and obtains a commitment that includes a corrective action plan from the Enterprise to remediate the findings. Following execution of the plan, the Enterprise’s internal audit function or an independent third party validates the completion of remediation, and DER reviews corrective action through examination activities.

FHFA issues a report of examination that identifies supervisory concerns and contains examination ratings reflecting FHFA’s view of the regulated entity’s financial safety and soundness and risk management practices. The annual report of examination is signed by the Examinerin-Charge and issued to the Enterprise’s board of directors.

Supervision of the Federal Home Loan Banks

FHFA’s Division of Bank Regulation (DBR) is responsible for carrying out on-site examinations and ongoing supervision of the FHLBanks. Oversight of the FHLBanks promotes both safe and sound operation and achievement of their housing finance and community investment mission. In 2016, FHFA examined all of the FHLBanks and the OF. An Examiner-in-Charge and a team of examiners conduct each annual examination with support from financial analysts, economists, accountants, and attorneys. In addition, FHFA examiners visit the FHLBanks between examinations to follow up on examination findings and to discuss emerging issues.

Examiners communicate all adverse findings to FHFA management and any MRAs to the FHLBank’s board of directors and management. In addition, examiners obtain a commitment to correct significant deficiencies in a timely manner and then verify the effectiveness of those corrective actions.

DBR maintains an off-site monitoring program that reviews monthly and quarterly financial reports and other information, such as data on FHLBank investments and information related to member activity. DBR monitors debt issuances by the OF and tracks financial market trends. DBR and other FHFA groups also review FHLBank documents and analyze responses to a wide array of periodic and ad hoc information requests, including an annual survey of FHLBank collateral, unsecured credit data, liquidity, advances, and periodic data on certain FHLBank investment holdings.

Reportsof AnnualExaminations ofFannie Mae andFreddie Mac Financial Overviewof the Enterprises

The Enterprises were created by Congress to provide stability and liquidity in the secondary housing finance market. They purchase single-family mortgages that lenders have already made to borrowers, pool these mortgages into mortgage-backed securities (MBS), and sell them to investors. The Enterprises guarantee the payment of principal and interest on the underlying mortgages and charge lenders a guarantee fee for taking on the credit risk associated with the purchased mortgages. The Enterprises also purchase multifamily mortgages.

Enterprise Income – Fannie Mae reported annual net income of $12.3 billion and annual comprehensive income of $11.7 billion for 2016, compared to annual net income of $11.0 billion and annual comprehensive income of $10.6 billion for 2015.

Freddie Mac reported annual net income of $7.8 billion and annual comprehensive income of $7.1 billion for 2016, compared to annual net income of $6.4 billion and annual comprehensive income of $5.8 billion for 2015.

The Enterprises have two primary sources of revenue: 1) guarantee fees on mortgages held by consolidated trusts holding Enterprise MBS; and 2) the difference between the interest income earned on the assets in the Enterprises’


retained mortgage portfolios and the interest expense paid on the debt that funds those assets. In 2016, as in prior years, the Enterprises’ earned a greater proportion of net income from guarantee fees than from interest income. This shift is primarily driven by the impact of guarantee fee increases and the reduction of the retained portfolios in accordance with the requirements of the Preferred Stock Purchase Agreements (PSPAs) between the U.S. Department of the Treasury (Treasury Department)

and the Enterprises. Figure 1 shows changes since 2012 in the level and composition of the Enterprises’ net interest income.

Enterprise Mortgage Portfolios – Total book of busi-ness balances of MBS held by investors for each Enterprise have been relatively stable over the past few years. Decreases in retained portfolio balances have generally been offset by increases in guarantee portfolio balances.

Figure 1 • Enterprises’ Net Interest Income 2012-2016

$ in

Mill

ions

Q4 20

15

Q3 20

15

Q2 20

15

Q1 20

15

Q4 20

14

Q3 20

14

Q2 20

14

Q1 20

14

Q4 20

13

Q3 20

13

Q2 20

13

Q1 20

13

Q4 20

12

Q3 20

12

Q2 20

12

Q1 20

12

Q4 20

16

Q3 20

16

Q2 20

16

Q1 20

16$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2016: $15,820

2016: $5,475

$ in

Mill

ions

Q4 20

15

Q3 20

15

Q2 20

15

Q1 20

15

Q4 20

14

Q3 20

14

Q2 20

14

Q1 20

14

Q4 20

13

Q3 20

13

Q2 20

13

Q1 20

13

Q4 20

12

Q3 20

12

Q2 20

12

Consolidated TrustsRetained Portfolio

Q1 20

12

Q4 20

16

Q3 20

16

Q2 20

16

Q1 20

16$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2016: $7,472

2016: $6,907

Fannie Mae

*Amounts represent total for the year.

Source: Federal Housing Finance Agency

Freddie Mac


Fannie Mae purchased $581 billion of single-family mort-gages in 2016, an increase of approximately 23 percent from $471 billion in 2015. Freddie Mac purchased $393 billion of single-family mortgages in 2016, an increase of approximately 12 percent from $351 billion in 2015. Multifamily purchase volumes increased year-over-year for both Enterprises, primarily driven by substantial growth in the overall multifamily market in 2016. Fannie Mae’s multifamily purchase volume in 2016 was $55.3 billion, an increase of $13.0 billion from 2015. Freddie Mac’s multifamily new purchase volume in 2016 was $56.8 billion, an increase of $9.6 billion from 2015. The Enterprises’ total mortgages and guarantees are shown in Figure 2.

The Enterprises’ investment portfolios continue to expose them to interest rate risk. Further, accounting differences for these financial assets and liabilities, including deriva-tives, render the Enterprises vulnerable to earnings vola-

tility when interest rates fluctuate. During 2016, interest rates declined at the beginning of the year but increased significantly at the end of the year. While this led to quarterly earnings volatility, the impact to full-year results was minimal.

Conservatorships and the Senior Preferred Stock Purchase Agreements – As part of HERA, Congress granted the Director of FHFA the discretionary authority to appoint FHFA as conservator or receiver of Fannie Mae, Freddie Mac, or any of the Federal Home Loan Banks, upon determining that specified criteria had been met. On September 6, 2008, FHFA exercised this authority and placed Fannie Mae and Freddie Mac into conservatorships. Since the Enterprises were placed into conservatorships, the Treasury Department has provided essential finan-cial commitments of taxpayer funding under the PSPAs. Fannie Mae and Freddie Mac have drawn a combined total of $187.5 billion in taxpayer support under the PSPAs to date. As of December 31, 2016, the Enterprises have

Figure 2 • Enterprises’ Total Mortgages and Guarantees2

Net increase, fourth quarter 2016:

Fannie Mae: $21.0 billionFreddie Mac: $27.4 billion

Fannie Mae: $3.1 Trillion

Freddie Mac: $2.0 Trillion

$ in

Tril

lions

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2016

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

Source: Enterprise Monthly Volume Summaries

2 Mortgage portfolio includes mortgages and mortgage-related securities held as investments and mortgages that are pooled into mortgage backed securities issued by the Enterprises for which the Enterprise guarantees payment of principal and interest.



paid the Treasury Department a total of $255.8 billion in dividends on senior preferred stock. Under the terms of the PSPAs, the Enterprises’ dividend payments do not offset the amounts drawn from the Treasury Department. The terms of the PSPAs also require the Enterprises to reduce their retained portfolios, and the Enterprises are constrained by the PSPAs from building capital while they remain in conservatorships.

Pursuant to the third amendment to the PSPAs on August 17, 2012, the fixed 10 percent dividend on senior preferred stock was replaced, effective January 1, 2013, with a sweep of net worth that exceeded a “Capital Reserve Amount,” which was established at $3.0 billion in 2013 with mandated declines of $600 million each subsequent year. Accordingly, the capital reserve for 2017 is $600 million and will decline to zero on January 1, 2018.

Reductions in income from the Enterprises’ shrinking mortgage investment portfolio and diminished income from non-recurring sources, combined with mark-tomarket volatility from the Enterprises’ derivatives portfolio, increase the likelihood of negative net worth in future quarters. Moreover, initiatives such as credit risk transfer transactions confer risk management benefits but impose costs that will reduce Enterprise earnings.

Fannie Mae (Federal NationalMortgageAssociation) Financial Performance – Net income of $12.3 billion for 2016 increased $1.3 billion from the $11.0 billion reported in 2015. Net income would have declined for the third consecutive year absent a $2.2 billion benefit for credit losses.

Fannie Mae’s financial performance is expected to continue to reflect the decline in net interest income from the retained portfolio as Fannie Mae complies with the PSPA requirement to reduce the volume of mortgage-related assets on its balance sheet. Further, given the large size of the Enterprise’s guaranty book of business, small changes in home prices and interest rates could have a significant impact on its financial performance.

Fannie Mae reported positive net worth of $6.1 billion at the end of 2016, $5.5 billion of which was paid to the Treasury Department as dividends on March 31, 2017 under the provisions of the PSPA. Fannie Mae did not request a Treasury Department draw during 2016, so the cumulative draws from the Treasury Department under the terms of the PSPA were unchanged from year-end 2015 at $116.1 billion, as dividend payments do not reduce the outstanding amount. As of December 31, 2016, the amount of available funding remaining for Fannie Mae under the PSPA was $117.6 billion. This amount would be reduced by any future draws.

Corporate Governance – Fannie Mae continues to make progress on improving its governance structure with the goal of establishing clear authority and accountability for all business and risk-related decisions. During 2016, the Enterprise operated under a new management-level committee structure for the entire year, refined committee charters, and developed and approved a significant enterprise governance policy. The Enterprise also updated its Strategic Plan to incorporate actions to address emerging risks and change management. These and other initiatives


currently underway could be affected by the ongoing level of change in Fannie Mae’s organizational structure, policies, processes, and systems.

Credit Risk – Credit risk remains elevated. The single-family mortgage book totaled $2.86 trillion at year end, which represents a slight increase from $2.85 trillion in 2015. The Enterprise continues to reduce the volume of adversely classified assets and seriously delinquent loans (SDQs). Non-performing loan sales combined with management’s loss mitigation efforts have contributed to the reduction of adversely classified assets by 26 percent to $30.2 billion. Troubled debt restructurings and nonaccrual loans fell 9.5 percent to $171.4 billion, and the unpaid principal balance (UPB) of real estate owned (REO) properties dropped 34 percent to $4.4 billion.

While these trends are positive, Fannie Mae still has a large volume of distressed assets with substantial credit risk. The quantity of distressed assets and REO properties on the books remain well above pre-crisis levels. As of year-end 2016, Fannie Mae had 121,864 single-family mortgage loans that were 180 days or more past due and 38,093 single-family REO properties in inventory, 40 percent of which are projected to be unmarketable.

Single-family loans originated between 2005 and 2008 have weaker credit characteristics and an average delinquency rate that is five times greater than the overall single-family book. Although loans originated during 2005-2008 made up only 8 percent of the single-family mortgage book as of year-end 2016, they accounted for 51 percent of single-family SDQ loans and 65 percent of single-family credit losses in 2016. In contrast, loans originated after 2008 represented 87 percent of the single-family mortgage book and a negligible amount of credit losses.

The overall SDQ rate continues to improve, but is still high compared to pre-crisis levels. The rate was 1.20 percent at year-end 2016 compared to 1.55 percent at year-end 2015.

Fannie Mae’s multifamily conventional guaranty book of business grew 10.9 percent from 2015 to $242.9 billion, consisting of $223.0 billion in MBS and $19.9 billion in retained multifamily whole loans. Retained multifamily loans decreased by 35.5 percent from 2015. Loans that

are 60 days or more past due increased from $123 million, or 0.07 percent of multifamily loans, to $129 million, or 0.05 percent of multifamily loans. Nonaccrual multifamily loans decreased during the year from $591 million to $403 million. The number of foreclosed multifamily properties increased to 13 properties with a carrying value of $85 million, up from 12 properties with a carrying value of $91 million at year-end 2015.

Mortgage servicers are among the Enterprise’s primary counterparties. At year-end 2016, the five largest mortgage servicers serviced 39 percent of the single-family guaranty book compared to 44 percent at year-end 2015, and the Enterprise’s largest mortgage servicer serviced about 17 percent of the single-family book of business.

In recent years, the Enterprise has seen a shift in servicing to non-depository institutions. The Enterprise’s five largest non-depository mortgage servicers servicing 16 percent of the total single-family guaranty book and 51 percent of the delinquent single-family book at year-end 2016. Non-depository servicers often have a greater reliance on third-party sources of liquidity than depository servicers. In the event delinquent loan volumes increase, non-depository counterparties may have less financial capacity to satisfy repurchase requests.

Fannie Mae instituted updated financial requirements for single-family seller/servicers to create consistent and transparent business eligibility standards. The new standards include requirements for minimum net worth, capital ratios, and liquidity.

Mortgage insurers are Fannie Mae’s largest counterparty exposure. To manage the risk arising from these counter-parties, Fannie Mae has implemented private mortgage insurer eligibility requirements and requirements for mortgage insurance policies associated with insured loans that are sold to Fannie Mae. Additionally, Fannie Mae conducts oversight of approved mortgage insurers including oversight of their financial position.

Operational Risk – The level of operational risk remains a supervisory concern. Initiatives to retire legacy systems and applications and improve the Enterprise’s data management and infrastructure create potential for increased operational risk. The number, complexity, and breadth

F E D E R A L H O U S I N G F I N A N C E A G E N C Y6


of these initiatives present challenges, and strong project management is necessary to address the risk of migrating to the new information technology platform and integrating with the Common Securitization Platform (CSP).

Fannie Mae is still working to develop and test its business resiliency to ensure critical business systems are sustained in the event of a major disruption. These initiatives will help ensure comprehensive disaster recovery and business continuity capabilities.

Freddie Mac (Federal HomeLoan MortgageCorporation) Financial Performance – Freddie Mac reported annual net income of $7.8 billion and annual comprehensive income of $7.1 billion for 2016, compared to annual net income of $6.4 billion and annual comprehensive income of $5.8 billion for 2015. Freddie Mac’s earnings improvement was driven in part by lower derivative fair value losses due to an increase in longer-term interest rates during the second half of 2016. Although the full-year aggregate effect of both interest rate and spread volatility were relatively small in 2016, quarterly sensitivity and volatility were high. Quarterly comprehensive income in 2016 varied from a high of $3.9 billion in the fourth quarter to a loss of $200 million in the first quarter.

Freddie Mac reported positive net worth of $5.1 billion at the end of 2016, $4.5 billion of which was paid to the Treasury Department as dividends on March 31, 2017. At year-end 2016, Freddie Mac’s cumulative draws from the Treasury Department under the terms of the PSPA was unchanged from year-end 2015 at $71.3 billion, as dividend payments do not reduce the outstanding amount. As of December 31, 2016, the amount of funding remaining for Freddie Mac under the PSPA was $140.5 billion. This amount would be reduced by any future draws.

Corporate Governance – Management has largely completed planned organizational changes and transition of risk functions for implementation of an enhanced risk management framework. Additional work remains to be done, including the revision of risk appetite and the completion of the risk taxonomy initiative. Enterprise Risk Management continues to remediate model governance concerns and implement its risk management framework. Further work remains to establish a strong information security risk management framework.


Credit Risk – As of year-end 2016, the book of single-family mortgage loans originated after 2008 represents more than two-thirds of the portfolio (excluding mortgages refinanced under HARP and other relief programs). At year-end 2016, the book’s SDQ rate was only 0.20 percent. Freddie Mac actively pursued transactions to reduce credit risk, including credit risk transfers and nonperforming loan sales.

Performance of the book of single-family mortgages originated before 2009 showed further improvement in 2016, but it continues to weigh down overall credit quality. At year-end 2016, this book accounted for 78 percent of credit losses despite being only 12 percent of the total single-family portfolio. Many loans have been modified and are performing well, due in part to lower modified interest rates and monthly payment amounts. Nevertheless, although the pre-2009 book’s SDQ rate improved to 3.59 percent in 2016 from 4.12 percent in 2015, it is significantly worse than the overall SDQ rate for single-family mortgages.

The overall SDQ rate continues to improve. The rate was 1.00 percent at year-end 2016 compared to 1.32 percent at year-end 2015. However, the SDQ rate is still high compared to pre-crisis levels. Between January 1999 to December 2007, the SDQ rate ranged from 0.40 percent to 0.87 percent.

Freddie Mac’s multifamily portfolio grew by 13.4 percent from 2015 to $212.9 billion, consisting of $158 billion in the guarantee portfolio, $42.4 billion in unsecuritized loans, and $12.5 billion in MBS. Multifamily business continued to experience rapid growth in funding and securitization volumes in 2016, with total purchase volumes reaching $56.8 billion, up from $47.3 billion in 2015. Nearly 90 percent of this volume was designated as held-for-sale and intended for securitization. The multifamily SDQ rate ended the year at 0.03 percent.

Mortgage servicers are among the Enterprise’s primary counterparties. At year-end 2016, the five largest mortgage servicers serviced 46 percent of the single-family guarantee book compared to 49 percent at year-end 2015, and the Enterprise’s largest mortgage servicer serviced about 19 percent of the single-family book of business.

In recent years, the Enterprise has seen a shift in servicing to non-depository institutions, with the Enterprise’s three largest non-depository mortgage servicers servicing approximately 10 percent of the total single-family guaranty book. Non-depository servicers often have a greater reliance on third-party sources of liquidity than depository servicers. In the event delinquent loan volumes increase, non-depository counterparties may have less financial capacity to satisfy repurchase requests.

Freddie Mac instituted updated financial requirements for single-family seller/servicers to create consistent and transparent business eligibility standards. The new standards include requirements for minimum net worth, capital ratios, and liquidity.

Mortgage insurers are Freddie Mac’s largest counterparty exposure. To manage the risk arising from these counter-parties Freddie Mac has implemented private mortgage insurer eligibility requirements and requirements for mortgage insurance policies associated with insured loans that are sold to Freddie Mac. Additionally, Freddie Mac conducts oversight of approved mortgage insurers including oversight of their financial position.

Operational Risk – Freddie Mac managed several significant projects underway during 2016, some of which are multi-year efforts. Freddie Mac continued to refine its oversight and reporting functions, providing improved status reporting of strategic projects. In 2016, Freddie Mac worked to develop its information management framework, including a data classification policy and information handling procedures. Despite improvements, Freddie Mac continues to face challenges and operational risk associated with project communication and coordination for large interdependent projects.

Throughout 2016, Freddie Mac continued to mature its business continuity and disaster recovery program, improving recovery time, reducing dependencies on in-region resources, and increasing business validation test coverage. Freddie Mac’s business units continued work to validate the functionality of the majority of business applications.

F E D E R A L H O U S I N G F I N A N C E A G E N C Y8

1 1 2 3 4 4 5 6 7 7 8 9 0 0 1 2 3 3 4 5 6 6 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 02 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 21 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

Figure 3 • Historical Portfolio of the FHLBank System

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provide a reliable source of liquidity to member financial institutions by making loans, known as advances, toReport of Annual member institutions. These advances increase the available funding for residential mortgages.Examinations

of Federal Home Financial Overview The FHLBanks saw substantial asset growth in 2016 drivenLoan Banks by increases in advances to members. Net income was strong at $3.4 billion.

Total assets increased by $88.8 billion, or 9.2 percent,Congress passed the Federal Home Loan Bank in 2016 to $1.06 trillion. At the end of 2016, aggre-Act in 1932 to establish the Federal Home Loan gate assets reached their highest quarter-end level sinceBank System and reinvigorate a housing market September 30, 2009 (Figure 3). Advances increased bydevastated by the Great Depression. The current System 11.2 percent, cash and investments increased by 4.4 per-includes 11 district FHLBanks, each serving a designated cent, and mortgages increased by 8.8 percent. At year-endgeographic area of the United States, and the OF, which 2016, the FHLBanks held 66.6 percent of total assets inissues consolidated obligations to fund the FHLBanks. advances, 28.4 percent in cash and investments, and 4.6The FHLBanks are member-owned cooperatives that percent in mortgages.



Figure 4 • FHLBanks Aggregate Net Interest Income and Net Income

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illio

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3 Federal MBS are guaranteed by Ginnie Mae or the National Credit Union Administration.

4 Most notably, the FHLBank of San Francisco received $510 million and the FHLBank of Des Moines received $376 million in settlements.

FHLBank holdings of private-label MBS continued to run off, while their holdings of MBS issued by Fannie Mae and Freddie Mac and liquidity investments increased marginally. The aggregate investment portfolio of the FHLBanks consists of 38.6 percent cash and liquidity, 37.5 percent MBS issued by the Enterprises, 4.9 percent Federal MBS,3

3.7 percent private-label MBS, and 20.2 percent other investments (principally agency debt securities and, for the FHLBank of Chicago, federally-backed student loan asset-backed securities). Mortgages held in portfolio grew 8.8 percent during 2016 to $48.5 billion at year-end.

The FHLBanks reported aggregate net income of $3.4 billion in 2016, up from $2.9 billion in 2015, with 2016 replacing 2015 as the most profitable year in the history of the Federal Home Loan Bank System. All FHLBanks were profitable over the year. A $266 million year-over-year increase in net interest income and a $9 million decrease

in operating expenses supported higher earnings. The FHLBanks realized $952 million in non-recurring gains from litigation settlements primarily related to private-label MBS and $47 million in gains on derivatives in 2016.4 Higher net interest income and large litigation gains were primarily responsible for the elevated 2016 earnings (Figure 4).

Poor performance of private-label MBS had a much smaller effect on the FHLBanks in 2016 than from 2009-2012. In 2016, the FHLBanks recorded impairment charges on these securities of only $23 million, lower than the $79 million reported in 2015 and substantially lower than the high of $2.4 billion in 2009. In fact, in 2016 the FHLBanks accreted back $259 million of income that they had previously recorded as losses. Though subject to risks, legacy private-label MBS assets have generally produced premium yields in recent years.


1 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 10 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 02 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

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Figure 5 • Retained Earnings of the FHLBanks

Percent of Assets

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Retained Earnings (left) Retained Earnings to Assets (right)



Strong profitability allowed the FHLBanks to continue to non-depository community development financial institubuild retained earnings in 2016. Aggregate retained earn- tions. Approximately 58 percent of FHLBank members ings totaled $16.3 billion, or 1.5 percent of assets, at the were active borrowers. FHFA’s final rule on FHLBank end of 2016. The total includes $2.9 billion in restricted membership, published in January 2016, established retained earnings associated with the Joint Capital a transition period of up to one year after the effective Enhancement Agreement.5 At year-end 2008, in the date of the rule for captive insurance companies that had immediate aftermath of the financial crisis, the FHLBanks joined a Federal Home Loan Bank after the Notice of held only $3.0 billion of aggregate retained earnings, rep- Proposed Rulemaking on September 12, 2014. The rule resenting 0.2 percent of assets (Figure 5). required FHLBanks to terminate membership for captive

in this group by February 19, 2017. The final rule allowedFHLBank Membership – At the end of 2016, the

for a five-year transition period for captives that hadFHLBanks had a total of 7,131 members. The member-

joined prior to the Notice of Proposed Rulemaking, whichship consisted of 4,517 commercial banks, 1,388 credit

means the FHLBank must terminate membership for cap-unions, 782 thrifts, 399 insurance companies, and 45

tives in this group by February 2021.

Until the third quarter of 2011, the FHLBanks were required to pay 20 percent of pre-assessment income to pay the interest on bonds issued by the Resolution Funding Corporation (REFCORP), the proceeds from which were used to resolve the savings and loan crisis of the late 1980s. After satisfying the total obligation with the July 2011 payment, the FHLBanks entered into the Joint Capital Enhancement Agreement, which requires each FHLBank to direct the funds previously paid to REFCORP into a restricted retained earnings account. The FHLBanks cannot pay dividends from this restricted retained earnings account and each FHLBank must continue to build it until it equals one percent of its average consolidated obligations.


5

https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Members-of-Federal-Home-Loan-Banks-2014.aspxhttps://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Members-of-Federal-Home-Loan-Banks-2014.aspx


FHLBank Advances – The FHLBanks provide long- and short-term advances (loans) to their members. Advances are primarily collateralized by residential mortgage loans, commercial real estate loans, and government and agency securities. Community financial institutions may pledge small business,6 small farm, and small agri-business loans as collateral for advances.

In 2016, FHLBank advances increased by $71.2 billion, to $705.2 billion. The increase marked the fifth consecutive year of advance growth, following three consecutive years of declines. Although FHLBank advances have increased in recent years, demand for advances is below the levels experienced during the height of the global financial crisis. At year-end 2016, advances reached their highest quarter-end level since September 30, 2009. During 2016, eight FHLBanks reported increases in advances and three reported decreases. Typically, FHLBank members use advances to fund mortgage portfolios, meet operational liquidity needs or meet other funding requirements. In recent years, some larger members may have increased their use of advances to meet higher regulatory liquidity requirements.

Concentration of advances to subsidiaries of large bank holding companies remains high. The top four borrowers as of the end of 2016 – J.P. Morgan Chase, Wells Fargo, Citigroup, and PNC – accounted for 29.5 percent of aggregate advances (Figure 6). Combined, total year-end advances to subsidiaries of these four holding companies increased in 2016.7 The largest increase came from Wells Fargo, which added $40.0 billion in 2016, bringing its balance to $77.1 billion. Citigroup and J.P. Morgan Chase also increased their borrowings by $15.8 billion and $7.9 billion, respectively.

FHLBank Mortgage Programs – The FHLBanks also operate both on-balance-sheet and off-balance-sheet programs through which members can sell mortgage loans. Under Acquired Member Assets (AMA) programs, the FHLBanks acquire and hold (on their balance sheet) conforming and government guaranteed or insured loans.

The AMA programs are structured such that the FHLBanks manage the interest-rate risk and the participating member manages a substantial portion of the risks associated with originating the mortgage, including much of the credit risk. Through the two existing AMA programs, Mortgage Partnership FinanceTM (MPF) and Mortgage Purchase Program (MPP), FHLBanks offer various products to members with differing credit risk-sharing structures. In 2016, the FHLBanks purchased a total of $12.5 billion of mortgages from their members to hold as AMA.

FHFA issued a final rule reorganizing the regulation governing AMA programs on December 19, 2016. Among other changes, the final rule removed or replaced references to Nationally Recognized Statistical Ratings Organizations (NRSRO), provided the FHLBanks greater flexibility in choosing the model they use to estimate the required credit enhancements, authorized the transfer of mortgage servicing rights on AMA loans to any institution, and allowed FHLBanks to acquire mortgage loans that exceed the conforming loan limit if they are guaranteed or insured by a department or agency of the U.S. government.

FHFA has also authorized off-balance-sheet mortgage programs, separate from AMA programs. Under the off-balance-sheet programs in operation as of the end of 2016, members of FHLBanks participating in off-balance-sheet mortgage programs sell mortgages to the FHLBank of Chicago, which either concurrently sells the loan to either Fannie Mae (MPF Xtra) or an investor (MPF Direct), or pools the loans into securities guaranteed by the Government National Mortgage Association (MPF Government MBS). In 2016, members delivered $3.7 billion of mortgages under MPF Xtra and $158 million of jumbo mortgages under MPF Direct. The members delivered $438 million of mortgages to the FHLBank of Chicago to securitize through the MPF Government MBS program.

Capital – The FHLBanks’ regulatory capital primarily consists of $37.9 billion paid by member institutions for FHLBank capital stock and $16.3 billion in retained earn

6 As defined in the Bank Act, the term community financial institution (CFI) means a member, the deposits of which are insured under the Federal Deposit Insurance Act, that has average total assets over the last three years at or below an established threshold. For calendar year 2016, the CFI asset threshold is $1.128 billion. FHLBank members that are CFIs may pledge small business loans, small farm loans, small agri-business loans, and, for 2013 and thereafter, community development loans, all of which may be fully secured by collateral other than real estate, and securities representing a whole interest in such loans.

7 All advance metrics for the four largest borrowers are expressed as par values and may not match previous advance data expressed as book values.

https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Acquired-Member-Assets-Final-Rule.aspx


Figure 6 • Total Year-End FHLBank Advance Holdings ($ Billions)8

Holding Company 2011 2012 2013 2014 2015 2016

JP Morgan Chase & Co. 17.8 42.0 61.8 65.0 71.5 79.5

Wells Fargo & Company 2.6 2.2 19.1 34.1 37.1 77.1

Citigroup Inc. 15.8 20.4 25.2 31.0 17.8 33.6

PNC Financial Services Group, Inc. 7.0 9.4 12.9 20.0 20.1 17.5

Top 4 Borrowers9 77.7 98.6 135.1 154.3 148.8 207.7

Other Members 325.5 315.1 357.4 411.9 482.4 496.5

Aggregate Advances 403.2 413.7 492.5 566.2 631.2 704.3

Top 4 Share 19.3% 23.8% 27.4% 27.3% 23.6% 29.5%

ings as of December 31, 2016. Aggregate retained earnings increased from 2015 but continued to be 1.5 percent of assets at the end of 2016. The ratio of retained earnings to assets ranged from 0.8 percent to 3.8 percent at the individual FHLBanks. At year-end 2016, all FHLBanks met both the minimum regulatory capital ratio of 4 percent of assets and their individual risk-based capital requirements.

Capital stock includes $1.7 billion in mandatorily redeemable capital stock, which arises from stock redemption requests by members or capital stock held by former members. The rise in mandatorily redeemable capital stock from $745 million in 2015 corresponded with the reclassification of captive insurance companies, which were deemed ineligible for membership in FHFA’s final rule on FHLBank membership.

Asset Quality – Asset quality at the FHLBanks was generally adequate in 2016, though examiners identified areas where the FHLBanks could improve their practices, or where the FHLBanks were exposed to specific risks. The credit risk of the advance portfolios continues to be low. The FHLBanks require members to fully secure advances with eligible collateral before borrowing from the FHLBank, and no FHLBank has ever had a credit loss from advances to a member. The quality and value of collateral are fundamental in protecting the FHLBanks from credit

losses on advances. The FHLBanks apply a discount to the market value or book value10 of the collateral, known as a “haircut,” based on the FHLBank’s assessment of the risk of the asset. Examiner concerns included the documentation of assumptions and rationale for choices made on haircut and membership credit rating models.

While the overall risk of advances is low, some FHLBanks exhibit business concentrations to a few large borrowers, some FHLBanks have small or declining advance portfolios, and some have large exposures to insurance company members. Business concentration to a few large borrowers may lead to large declines in a FHLBank’s advances if one of the large borrowers terminates its membership or otherwise decides not to renew its advances. Small or declining advance portfolios may lead to reduced operational efficiency or relative increases in other, riskier assets. Lending to insurance companies presents different risks relative to insured depository institutions, as each state has its own laws and regulatory framework for insurance companies.

Private-label MBS portfolios continued to be a source of credit risk to the FHLBanks in 2016. However, portfolios continue to wane and the risks are generally decreasing and are concentrated at a few FHLBanks. In many cases, FHLBanks have reclaimed previously recognized losses from these portfolios as the performance of the securities improved.

8 Metrics in this table are expressed in par value and may not match financial statements expressed in book value.

9 The member listing presents the top four borrowers in the latest period and their borrowing history going back five years. The top four summation and share presents the total borrowing of the top four in the given time period. As the top-four may have changed over time, the summation for previous quarters may include borrowing from members not listed above.

10 For instance, book value is used for blanket lien listed collateral.



The serious delinquency rates on the FHLBanks’ AMA have been low relative to the market at 0.69 percent in 2016, down from 0.94 percent at year-end 2015.

Management – Effective management of an FHLBank involves engaged, capable, and experienced directors and senior management, a coherent strategy and business plan, clear lines of responsibility and accountability, and appropriate risk limits and controls. Governance of the FHLBanks was adequate in 2016, though examiners identified several areas for improvement, including aspects of the internal audit and enterprise risk management functions. A few FHLBanks had violations for extending long-term advances to a member in excess of its residential housing finance assets.

Earnings – Aggregate net income at the FHLBanks was $3.4 billion, marking the most profitable year in the history of the FHLBank System. Income was elevated in 2016 in part because of extraordinary items, including $952 million in legal settlements in favor of some FHLBanks. The settlements related to private-label MBS securities purchased before the financial crisis.

Profitability metrics have increased with earnings. Return on assets averaged 34 basis points, up from 31 basis points in 2015, while return on equity averaged 6.9 percent, up from 6.1 percent.

While earnings continue to be strong, some FHLBanks rely on non-mission assets to support their earnings. At year-end 2016, 28 percent of FHLBank assets were investments, with concentrations at individual FHLBanks as high as 44 percent.

Liquidity – At year-end 2016, the FHLBanks held $116.1 billion of cash and liquidity investments. The aggregate liquidity portfolio of the FHLBanks consisted of 6 percent cash, 42 percent federal funds sold, 45 percent reverse repurchase agreements, and the rest in certificates of deposit, loans to other FHLBanks, and interest bearing deposits.

The FHLBanks often issue discount notes, which are short term debt instruments with a maturity of one year or less and which are issued at a discount to their face value at maturity. After receiving guidance from FHFA and as a result of a coordinated effort by the FHLBanks, discount

notes decreased to 41.5 percent of aggregate FHLBank debt outstanding at year-end 2016 compared to 54.6 percent at year-end 2015. The FHLBanks have primarily turned to floating-rate bonds in replacing the discount notes. The total short-term debt outstanding (discount notes and bonds with maturities of one year or less), however, decreased less than a percentage point from 2015, to 75.4 percent. Short-term funding requires more frequent debt rollover than does longer-term funding. All FHLBanks met their liquidity requirements in 2016.

Sensitivity to Market Risk – Mortgage assets continue to be the greatest source of market risk. They are typically longer-dated instruments than most other FHLBank assets, have less predictable cash flows, and have experienced the greatest swings in market value. Mortgage assets, comprised of mortgage loans purchased from member institutions and MBS, were $187 billion or 17.7 percent of total assets at the end of 2016, compared to $178 billion or 18.4 percent at the end of 2015.

Some FHLBanks with significant mortgage holdings hedge the market risk by extensive use of callable bonds to fund those assets. Other FHLBanks use more complicated hedging strategies that involve interest-rate swaps, “swaptions” (options to enter into interest-rate swaps), and options. The FHLBanks are also exposed to “basis risk,” which arises when the index for a floating-rate asset does not move identically with the index for the supporting floating-rate liability.

The FHLBanks’ market value of equity, which is the estimated market value of the FHLBank System’s assets less the market value of its liabilities, is an important indicator of their ability to redeem or repurchase stock at par. Because all stock transactions occur at the par value of $100 per share, the market value of an FHLBank’s equity per share of capital stock should equal or exceed $100.

The market value-to-capital stock ratios of the FHLBanks were again strong in 2016 averaging 145 percent of the par value of capital stock, highlighting their generally sound financial condition. All FHLBanks had market values greater than the par value of their capital stock, indicating their ability to exchange capital stock at par without adversely affecting other members.


Figure 7 • Market Value of Equity-to-Par Value of Capital Stock by Various Interest-Rate Changes

Parallel Interest Rate Change in Basis Points -200 -100 -50 0 50 100 200

Boston 143 148 148 148 146 143 138

New York 126 123 123 123 122 122 121

Pittsburgh 136 130 129 129 129 128 128

Atlanta 150 139 138 138 137 136 132

Cincinnati 111 115 115 114 113 111 108

Indianapolis 153 158 158 157 155 153 148

Chicago 277 273 269 268 266 264 259

Des Moines 120 120 120 120 119 118 115

Dallas 154 152 151 152 152 152 152

Topeka 179 178 180 181 182 181 177

San Francisco 232 223 220 218 216 214 209

To measure the sensitivity of the market value of equity in a changing interest rate environment, Figure 7 shows the ratio at each FHLBank at year-end 2016 and the estimated change to the ratio in certain interest rate change scenarios. The estimated change in the ratio for each scenario is based on model results provided by the FHLBanks and restrict interest rates to non-negative values. Most FHLBanks show only modest changes in the ratio for these interest rate scenarios. The largest increase is 14 percentage points in a down 200-basis point scenario at the FHLBank of San Francisco, and the largest decrease is a 10 percentage point decline in an up 200-basis point scenario at the FHLBank of Boston. All FHLBanks report ratios above 100 percent in all 6 rate change scenarios.

Operational Risk – The FHLBanks engage in financial transactions that require financial models, technological resource systems, ledger accounting systems, and other processes that inherently expose them to operational risks.

While operational risk management was generally adequate, FHFA had supervisory concerns at some FHLBanks. Examiners identified areas that exhibited or could exhibit unacceptable operational risks in areas such as information security, vendor management, and business continuity. The internal control of user-developed applications,

such as spreadsheets, is also a concern at some FHLBanks.

FHLBank Directors’ Compensation and Expenses – The FHLBanks are governed by boards of directors ranging in size from 14 to 29. The majority of directors for the FHLBanks are officers or directors of member institutions with the remaining (at least 40 percent) being independent directors. Independent directors must reside in the FHLBank district for which they serve. They cannot be officers of a FHLBank or directors, officers, or employees of a member of the FHLBank on which they serve as directors.

The OF has a different structure, with five independent directors plus the FHLBank Presidents serving on its Board. The FHLBank Presidents do not receive compensation for their service on the OF board.

Before HERA, FHLBank directors’ compensation had statutory caps. In 2009, with the implementation of HERA, the caps were lifted, and the FHLBanks were allowed to pay reasonable compensation for the time required of their board of directors and necessary expenses, subject to FHFA review.

Each of the 11 FHLBanks and the OF provide FHFA with its Directors Compensation Policy (the Policy), which establishes the maximum compensation for each director, the criteria each director needs to meet in order to


Figure 8 • 2016 Annual Maximum Compensation for FHLBank Directors

Chair Vice Chair Audit

Committee Chair

Other Committee

Chairs Directors

Atlanta $ 100,000 $ 95,000 $ 95,000 $ 90,000 $ 80,000

Boston $ 105,000 $ 88,750 $ 88,750 $ 88,750 $ 80,000

Chicago $ 105,000 $ 95,000 $ 95,000 $ 90,000 $ 85,000

Cincinnati $ 135,000 $ 120,000 $ 117,000 $ 114,000 $ 100,000

Dallasa $ 97,500 $ 92,500 $ 87,500 $ 80,500 $ 72,500

Des Moines $ 125,000 $ 115,000 $ 110,000 $ 105,000 $ 95,000

Indianapolis $ 125,000 $ 105,000 $ 105,000 $ 105,000 $ 95,000

New York $ 120,000 $ 105,000 $ 105,000 $ 105,000 $ 95,000

Office of Financeb $ 130,000 – $ 110,000 – $ 95,000

Pittsburgh $ 125,000 $ 103,750 $ 103,750 $ 103,750 $ 91,250

San Franciscoc $ 115,000 $ 100,000 $ 100,000 $ 95,000 $ 80,000

Topekad $ 125,000 $ 105,000 $ 105,000 $ 105,000 $ 95,000

Average

Median

$ 117,292

$ 122,500

$ 103,182

$ 105,000

$ 101,833

$ 104,375

$ 98,364

$ 103,750

$ 88,646

$ 93,125

a The Chair of the Risk Committee and Chair of Strategic Planning, Operations and Technology Committee each receive $87,500. b The Vice Chair and “Other Committee” Chairs at the OF, when filled by one of the FHLBank Presidents, do not receive compensation for these responsibilities. c Members of the audit committee receive an additional $5,000. d The Vice Chair for Topeka may receive maximum compensation of $110,000 if he or she also served as chair of a committee.

receive that compensation, and the timing of payments for the upcoming year. FHFA assesses the maximum compensation utilizing third party market comparables. FHFA reviews each Policy to ensure that it contains provisions specifying that the FHLBank reduces compensation if the director does not participate in a sufficient number of meetings, or is found not to be a contributing member of the board. All of the FHLBanks and the OF have provisions for withholding compensation if a director’s attendance falls below a certain level. Based on the attendance reports and compensation paid reports submitted by each of the regulated entities for 2016, FHFA found that all of the FHLBanks and the OF complied with their policies and reduced director compensation when required. Reductions based on attendance occurred at two FHLBanks for two individual directors.

Figure 8 shows the maximum compensation available to the directors at each FHLBank and the OF for 2016. The figures in the table represent the approved maximum

F E D E R A L H O U S I N G F I N A N C E A G E N C Y

compensation amounts for the listed board positions. However, an individual director who serves in multiple capacities for the board, such as chairing multiple committees, may receive higher compensation based upon specific provisions of the individual Bank’s approved Directors Compensation Policy.

FHFA includes certain spousal and guest payments as compensation. Spouse/guest payments include travel expenses reimbursed to the director and the cost of group events offered to directors and their guests in conjunction with a meeting such as banquets, meals, and entertainment, allocated based on attendance. Where spouse/guest expenses are treated as perquisites, the director is required to pay taxes on these expenses. The FHLBanks reported perquisites consistent with FHFA’s treatment in 2016.

Figure 9 reflects director compensation paid (and deferred) in 2016, in addition to amounts paid for spouse/guest travel in 2016.

16


Figure 9 • FHLBank Compensation for 2016

Federal Home Loan Bank

Director Compensation Paid in Cash Director Deferred Compensation Spouse/Guest Expenses

Total Director Compensation Paid (Cash + Deferred + Guest/Spouse

Expenses)

Average Total Average Total Average Total Average Total

Atlanta $ 63,185 $ 884,593 $ 20,692 $ 289,693 $ 2,146 $ 30,044 $ 86,024 $ 1,204,330

Boston $ 49,877 $ 798,025 $ 36,061 $ 576,975 $ 0 $ 0 $ 85,938 $ 1,375,000

Chicago $ 83,217 $ 1,414,688 $ 5,018 $ 85,312 $ 527 $ 8,962 $ 88,762 $ 1,508,962

Cincinnati $ 107,529 $ 1,828,000 $ 0 $ 0 $ 1,093 $ 18,576 $ 108,622 $ 1,846,576

Dallas $ 58,613 $ 937,800 $ 21,013 $ 336,200 $ 654 $ 10,470 $ 80,279 $ 1,284,470

Des Moines* $ 87,267 $ 2,530,750 $ 12,388 $ 359,250 $ 231 $ 6,712 $ 99,887 $ 2,896,712

Indianapolis $ 81,328 $ 1,301,250 $ 19,922 $ 318,750 $ 1,727 $ 27,629 $ 102,977 $ 1,647,629 New York $ 94,836 $ 1,801,875 $ 0 $ 0 $ 818 $ 15,533 $ 95,653 $ 1,817,408

Office of Finance $ 105,000 $ 525,000 $ 0 $ 0 $ 0 $ 0 $ 105,000 $ 525,000

Pittsburgh $ 71,810 $ 1,364,386 $ 13,807 $ 262,338 $ 299 $ 5,689 $ 85,916 $ 1,632,413

San Francisco $ 56,304 $ 788,250 $ 40,098 $ 561,375 $ 393 $ 5,501 $ 96,795 $ 1,355,126

Topeka $ 100,248 $ 1,603,962 $ 0 $ 0 $ 2,686 $ 42,981 $ 102,934 $ 1,646,943

Total (all directors) $ 959,212 $ 15,778,578 $ 168,999 $ 2,789,893 $ 10,575 $ 172,097 $ 1,138,787 $ 18,740,569

Average

Median

$ 79,934

$ 82,273

$ 1,314,882

$ 1,332,818

$ 14,083

$ 13,098

$ 232,491

$ 276,015

$ 881

$ 591

$ 14,341

$ 9,716

$ 94,899

$ 96,224

$ 1,561,714

$ 1,570,687

*FHLB Des Moines had 29 Directors in 2016 as they are still in transition from the merger with FHLB Seattle in 2015.

Figure 10 • FHLBank Director Expenses for 2016


Board Expenses Attributable to Directors

Director Training Expenses

Other Director Expenses (if any)

Group Expenses

Average Total Average Total Average Total Average Total

Atlanta $ 11,924 $ 166,937 $ 3,813 $ 53,381 $ 794 $ 11,120 $ 5,180 $ 72,517

Boston $ 3,907 $ 62,509 $ 724 $ 11,583 $ 1,187 $ 18,992 $ 2,107 $ 33,719

Chicago $ 7,995 $ 135,907 $ 1,425 $ 24,220 $ 618 $ 10,499 $ 2,662 $ 45,259

Cincinnati $ 10,922 $ 185,666 $ 1,585 $ 26,942 $ 0 $ 0 $ 2,010 $ 34,176

Dallas $ 6,094 $ 97,505 $ 1,848 $ 29,572 $ 494 $ 7,909 $ 3,503 $ 56,053

Des Moines $ 7,652 $ 221,905 $ 4,077 $ 118,234 $ 1,191 $ 34,552 $ 5,679 $ 164,698

Indianapolis $ 9,350 $ 149,608 $ 2,540 $ 40,633 $ 664 $ 10,618 $ 5,664 $ 90,629

New York $ 6,622 $ 125,824 $ 845 $ 16,062 $ 536 $ 10,193 $ 2,237 $ 42,510

Office of Finance* $ 7,211 $ 36,056 $ 2,478 $ 12,390 $ 1,626 $ 8,128 $ 12,471 $ 62,353

Pittsburgh $ 7,481 $ 142,148 $ 3,349 $ 63,630 $ 1,063 $ 20,205 $ 2,720 $ 51,686

San Francisco $ 10,541 $ 147,576 $ 3,935 $ 55,083 $ 3,053 $ 42,740 $ 3,003 $ 42,045

Topeka $ 9,448 $ 151,161 $ 936 $ 14,983 $ 886 $ 14,181 $ 2,256 $ 36,098

Total (all directors) $ 99,147 $ 1,622,802 $ 27,554 $ 466,712 $ 12,113 $ 189,137 $ 49,494 $ 731,743

Average

Median

$ 8,262

$ 7,823

$ 120,133

$ 144,862

$ 2,489

$ 2,163

$ 35,730

$ 28,257

$ 1,119

$ 840

$ 17,238

$ 10,869

$ 3,948

$ 2,862

$ 59,243

$ 48,473

* Group expenses for the Office of Finance cover the full board including the 11 FHLBank Presidents.



Figure 11 • FHLBank Director Compensation and Expenses for 2016


Total Director Compensation Paid (Cash + Deferred + Spouse/Guest

Expenses)

Total Director Expenses (All expenses including board expenses,

training, group and other expenses)

Total Director Cost (Total Compensation +

Total Expenses)

Average Total Average Total Average Total

Atlanta $ 86,024 $ 1,204,330 $ 21,711 $ 303,955 $ 107,735 $ 1,508,285

Boston $ 85,938 $ 1,375,000 $ 7,925 $ 126,803 $ 93,863 $ 1,501,803

Chicago $ 88,762 $ 1,508,962 $ 12,699 $ 215,885 $ 101,462 $ 1,724,847

Cincinnati $ 108,622 $ 1,846,576 $ 14,517 $ 246,784 $ 123,139 $ 2,093,360

Dallas $ 80,279 $ 1,284,470 $ 11,940 $ 191,038 $ 92,219 $ 1,475,509

Des Moines $ 99,887 $ 2,896,712 $ 18,600 $ 539,389 $ 118,486 $ 3,436,101

Indianapolis $ 102,977 $ 1,647,629 $ 18,218 $ 291,489 $ 121,195 $ 1,939,118

New York * $ 95,653 $ 1,817,408 $ 10,242 $ 194,589 $ 105,895 $ 2,011,997

Office of Finance $ 105,000 $ 525,000 $ 23,785 $ 118,927 $ 128,785 $ 643,927

Pittsburgh $ 85,916 $ 1,632,413 $ 14,614 $ 277,669 $ 100,531 $ 1,910,082

San Francisco $ 96,795 $ 1,355,126 $ 20,532 $ 287,444 $ 117,326 $ 1,642,570

Topeka $ 102,934 $ 1,646,943 $ 13,526 $ 216,424 $ 116,460 $ 1,863,366

Total (all directors) $ 1,138,787 $ 18,740,569 $ 188,309 $ 3,010,395 $ 1,327,096 $ 21,750,964

Average

Median

$ 94,899

$ 96,224

$ 1,561,714

$ 1,570,687

$ 15,692

$ 14,565

$ 250,866

$ 231,604

$ 110,591

$ 112,098

$ 1,812,580

$ 1,794,107

* The FHLBank of New York had 19 directors in 2016; one director declined compensation. His expenses were approximately one-half of the average shown.

In addition to information about director compensation, the FHLBanks and the OF are required to submit to FHFA for review the expenses they pay for their boards of directors each year. In 2016, FHFA continued to request that the FHLBanks submit directors’ expenses in detail. Figure 10 shows the expense per director and the total expense for the FHLBank for each category requested.

Board expenses attributable to directors include all items reimbursed to the director for his or her travel, including transportation and lodging, rental car, mileage, and meals while traveling. Board training expenses include expenses to pay for external speakers to address boards of directors meetings, board members to attend training conferences, and educational materials. The other director expense category includes expenses, whether reimbursed to the

director or paid directly by the FHLBank, for attendance at FHLBank-related events such as, but not limited to, annual member meetings, Chair/Vice Chair meetings, and Council of FHLBanks meetings. Group expenses include those expenses that are not directly attributable to individuals such as food and beverage service while meetings are in progress, audio-visual services, and meeting space.

Figure 11 is a summary table of the compensation and total expenses shown as an average per director and a total expenditure for each FHLBank.


District 1 • The Federal Home Loan Bank of Boston11

A t year-end, the FHLBank of Boston was the eighth largest FHLBank, with assets of $61.5 billion. Its balance sheet consisted of 63.5 percent advances, 6.0 percent mortgages, and 30.1 percent cash and investments. MBS investments totaled $7.9 billion, of which $820 million were private-label MBS. The FHLBank’s MBS-to-regulatory capital ratio was 2.24, below the regulatory limit of 3.00 times capital. Funding through consolidated obligations totaled $57.2 billion and comprised 52.5 percent discount notes and 47.5 percent bonds. Consolidated obligations with a remaining maturity of one year or less, including discount notes, totaled $38.8 billion.

The FHLBank reported net income of $173 million for the year, the eighth highest among the FHLBanks. Its return on assets of 0.29 percent was the sixth highest in the FHLBank System. Litigation settlements and improving private-label MBS cash flows bolstered the Bank’s profitability significantly, with the FHLBank reporting net interest income of $252 million and income resulting from settlements of $39 million. The FHLBank’s net interest spread of 0.38 percent was the fifth highest in the FHLBank System. While its yield on advances of 0.95 percent was the second highest of the FHLBanks, its cost of funds on consolidated obligations of 0.83 percent was the fourth highest. Operating expenses to assets of 0.12 percent were fifth highest of any FHLBank.

The FHLBank’s regulatory capital ratio was 5.95 percent, which was the third highest in the FHLBank System. Its retained earnings of $1.2 billion were the sixth highest in

the FHLBank System. Additionally, the FHLBank’s market value of equity was 147.5 percent of the par value of its member capital stock.

The FHLBank had 447 members at year-end 2016: 174 thrifts, 159 credit unions, 64 commercial banks, 46 insurance companies, and 4 community development financial institutions. The FHLBank’s 10 largest borrowers held 49.0 percent of total advances, the second lowest concentration in the FHLBank System.

At the time of its July 2016 examination, FHFA concluded the FHLBank’s overall condition and operations were satisfactory, with strong capital and liquidity positions. Further, the examination observed the credit risk exposure to the private-label MBS portfolio continued to decrease, and that the FHLBank had sufficient earnings to cover operations. However, the examination identified that management, with board oversight, needed to provide appropriate attention to model risk management and information security improvements. The examination also identified that the FHLBank’s mortgage asset pricing framework, with associated profitability metrics, did not ensure adequate rates of return to compensate the FHLBank for the costs and risks assumed in holding longterm mortgage assets.

11 This summary reflects conclusions made at the time of FHFA’s 2016 examination of the FHLBank of Boston supplemented by year-end financial information.


District 2 • The Federal Home Loan Bank of New York12

A t year-end, the FHLBank of New York was the second largest FHLBank with assets of $143.6 billion. Its balance sheet consisted of 76.1 percent advances, 1.9 percent mortgages, and 21.7 percent cash and investments. Advances of $109.3 billion represented 76.1 percent of total assets, which was the highest in the FHLBank System. The FHLBank held a small portfolio of private-label MBS, totaling $233 million, or 0.2 percent of assets. Funding through consolidated obligations totaled $134.1 billion and comprised 36.8 percent discount notes and 63.2 percent bonds. Consolidated obligations with a remaining maturity of one year or less, including discount notes, totaled 104.6 billion.

The FHLBank reported net income of $401 million for the year, the third highest among the FHLBanks. Net interest income totaled $554 million. Advances provided 67.6 percent of interest income, while investments and mortgages provided 26.0 percent and 6.4 percent, respectively. The FHLBank’s net interest spread was 0.40 percent (fourth highest in the System), return on assets was 0.31 percent (fifth highest), and return on equity was 5.86 percent (sixth highest). At 0.96 percent, the FHLBank’s yield on advances was the highest in the System. The FHLBank’s cost of funds on consolidated obligations, at 0.67 percent, was the fourth lowest. Operating expenses of $103 million were the third highest of any FHLBank in nominal terms, but at 0.08 percent, ranked third lowest (tied with two other FHLBanks) when measured as a percentage of total assets.

The FHLBank’s regulatory capital ratio was 5.40 percent, which was the fourth highest in the FHLBank System, and its $7.8 billion of regulatory capital comprised $6.3 billion capital stock, $1.4 billion retained earnings, and $31 million mandatorily redeemable capital stock. The FHLBank’s permanent capital to risk-based capital ratio, at 11.02 times, was the highest in the FHLBank System.

Total retained earnings of $1.4 billion were equivalent to 201 percent of the FHLBank’s risk-based capital requirement. The FHLBank’s market value of equity was 122.6 percent of the par value of member capital.

The FHLBank had 328 members at year-end 2016: 137 commercial banks, 90 credit unions, 84 thrifts, 14 insurance companies, and 3 community development financial institutions. The FHLBank’s 10 largest borrowers held 73.8 percent of total advances.

At the time of its April 2016 examination, FHFA concluded the FHLBank’s overall condition and operations were satisfactory with strong capital, earnings, and liquidity positions. The examination found that the FHLBank’s core mission asset ratio was among the highest in the System, exposure to private-label MBS was very low, the FHLBank’s retained earnings level was adequate relative to risk, and its risk profile was among the strongest in the System. Nevertheless, the examination identified weaknesses related to market risk model management, Internal Audit’s assessment of enterprise risk management, and ongoing issues in the administration and oversight of the Affordable Housing Program (AHP). In addition, the examination identified that the FHLBank’s failure to comply with the reporting requirements of the FHFA data reporting manual resulted in statutory and regulatory violations.

12 This summary reflects conclusions made at the time of FHFA’s 2016 examination of the FHLBank of New York supplemented by year-end financial information.



District 3 • The Federal Home Loan Bank of Pittsburgh13

A t year-end, the FHLBank of Pittsburgh was the fifth largest FHLBank, with assets of $101.3 billion. Its balance sheet consisted of 75.9 percent advances, 3.4 percent mortgages, and 20.6 percent cash and investments. MBS investments totaled $7.7 billion, of which $1.1 billion were private-label MBS. Although 81.6 percent of private-label MBS were below investment-grade, they represented less than 1 percent of total assets. Advances grew 3.1 percent to reach $76.8 billion at year-end. Advances with a remaining maturity of one year or less totaled $38.6 billion. Funding through consolidated obligations totaled $95.7 billion and comprised 70.2 percent bonds and 29.8 percent discount notes. Consolidated obligations with a remaining maturity of one year or less, including discount notes, totaled $74.2 billion.

The FHLBank reported net income of $260 million for the year and return on assets of 0.28 percent, both seventh highest among the FHLBanks. Net interest income totaled $349 million. Interest income on advances totaled $589 million, representing 59.7 percent of total interest income. The FHLBank’s net interest spread of 0.35 percent was the sixth highest in the FHLBank System, nominally rising from 0.34 percent in 2015. Yield on advances of 0.90 percent was the third highest, and the cost of funds on consolidated obligations of 0.73 percent was fifth highest in the FHLBank System. Operating expenses of $74 million were the seventh highest in nominal terms and tied for seventh highest (with two other FHLBanks) when compared to total assets at 0.08 percent.

The FHLBank’s regulatory capital ratio was 4.69 percent, which was the third lowest in the FHLBank System. Its retained earnings of $986 million were the fifth lowest in nominal terms and third lowest when compared to total assets at 0.97 percent. The FHLBank’s market value of equity was 128.9 percent of the par value of its member capital stock.

The FHLBank had 304 members at year-end 2016: 162 commercial banks, 64 thrifts, 53 credit unions, 23 insurance companies, and two community development financial institutions. The FHLBank’s 10 largest borrowers held 85.9 percent of total advances, the highest concentration in the FHLBank System.

At the time of its April 2016 examination, FHFA concluded the FHLBank’s overall condition and operations were strong. The examination found that the FHLBank remained in sound overall condition, adhered to its core mission focus, and continued its strong financial performance. The most significant concerns identified by the examination pertained to strengthening business continuity plan testing and establishing a more satisfactory disaster recovery site location. In addition, the examination recommended a more formal framework for pricing Mortgage Partnership Finance (MPF) loans and a continued refinement of the FHLBank’s analytical support for collateral haircuts.

13 This summary reflects conclusions made at the time of FHFA’s 2016 examination of the FHLBank of Pittsburgh supplemented by year-end financial information.


District 4 • The Federal Home Loan Bank of Atlanta14

A t year-end, the FHLBank of Atlanta was the third largest FHLBank, with assets of $138.7 billion. Its balance sheet consisted of 71.5 percent advances, 0.4 percent mortgages, and 27.6 percent cash and investments. MBS investments totaled $19.9 billion, of which $2.1 billion were private-label MBS. Although 87.0 percent of private-label MBS were below investment-grade, they represented 1.3 percent of assets. Advances totaled $99.1 billion at year-end, down 4.9 percent from 2015. Advances of $47.3 billion had a remaining maturity of less than one year. Funding through consolidated obligations totaled $129.9 billion and comprised 31.8 percent discount notes and 68.2 percent bonds. Consolidated obligations with a remaining maturity of one year or less, including discount notes, totaled $106.7 billion.

The FHLBank reported net income of $278 million for the year, the fifth highest among the FHLBanks. However, its profitability metrics, including net interest spread of 0.21 percent (lowest among the FHLBanks), return on assets of 0.20 percent, and return on equity of 4.08 percent (both secon

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